CDLHT’s distributable income for Q3 slips 30.5%

CDL Hospitality Trusts (CDLHT) has posted distributable income of about $16.97 million for the third quarter ended Sept 30, 2009, a 30.5 per cent drop from the same period last year.

The $16.97 million is after deducting $1.66 million that the trust is retaining for working capital.

The net distributable income for Q3 2009 reflects a distribution per unit of 2.04 cents for the period, which is 30.4 per cent lower than the 2.93 cents in the same year-ago period. However, CDLHT will not be making a payout for Q3.

CDLHT owns five Singapore hotels, the Orchard Hotel Shopping Arcade as well as Rendezvous Hotel Auckland.

Although its Singapore hotels suffered a 28 per cent year-on-year decline in room revenue per available room (or RevPAR) to $154 in Q3 2009, this was the strongest quarter performance this year.

The Q3 showing was a ‘significant improvement compared to the 39.6 per cent year-on-year decline in RevPAR in Q2 2009’, CDLHT said. ‘Management expects the positive trend of an easing in year-on-year RevPAR decline to continue into Q4 2009.’

Beyond this year, the trust is ‘poised to participate in the next tourism growth cycle as new demand generators act as catalysts in enhancing Singapore’s appeal’, it added.

Gross revenue slipped 21.4 per cent year on year to $22.9 million for Q3.

Although the Singapore hotels were able to maintain their occupancy rates at 86 per cent in the third quarter of 2009 due to contributions from the Apec conference and the Formula One Singapore Grand Prix, the average room rates achieved for the quarter remained soft due to stiff market competition, which was fuelled by cutbacks in business and leisure travel following the global financial crisis.

Net property income fell 21.5 per cent to $21.4 million for Q3 2009.

The counter ended three cents higher at $1.59 yesterday.

Better occupancy, but room rates still soft

What has changed?

• CDL Hospitality Trusts (CDLHT) announced its 3Q09 results on 30 October. Net-property income was 1% below our forecast but distribution-per-unit (DPU) was 12% above our forecast.

Impact

• For its five Singapore hotels, the occupancy rate improved to 86.1% compared with 85.5% a year ago. However, daily revenue-per-available room (revPAR) declined 28% YoY to S$154 because average room rates slipped to S$185 from S$250 a year ago.

• The major positive variance in the results came from significantly lower-thanexpected net-finance costs. However, with its entire debt refinanced as of 31 July, we expect the net-finance cost to increase substantially for 4Q09.

• We have revised up our DPU forecasts by 3.8% for FY09, by 5.5% for FY10, and by 1.65% for FY11. We have revised up our occupancy assumption to 80% (from 77%) for FY09 and to 85% (from 82%) for FY10.

Valuation

• With roughly a 4% increase in our revPAR assumption for FY10 to S$177, we have raised our six-month target price based on our RNG valuation method (a finite-life Gordon Growth Model) to S$1.36 (from S$1.29). The NAV as of 30 September was S$1.41. On our revised forecasts, CDLHT would trade at a forward yield of 5.9%, one of the lowest in the sector.

Catalysts and action

• We maintain our 4 (Underperform) rating for CDHLT. Performance in 3Q09 was largely within our expectations and a strong recovery in Singapore revPAR is far from certain, in our view. We believe any integrated resort-related disappointment would pose a major investment risk for CDLHT investors.

At inflection point; on course to a ‘V’ recovery

3Q09 results in-line with expectations. CDLHT reported 3Q09 DPU of 2.04¢ (+7.9% QoQ). Annualised 9M09 DPU came in at 5.9¢, in-line with our FY09 forecast. Net property income rose 11.3% QoQ to S$21.4m on the back of higher RevPARs achieved for all of its hotel properties. RevPAR rose 14.9% QoQ due to a 10.6ppt surge in occupancy in 3Q09. Excluding the S$1.7m income retained for working capital, DPU would have been 2.23¢. Maintain BUY, DDM-derived TP of S$2.15.

At inflection point; trading at mid-cycle valuations. 3Q09’s strong QoQ DPU growth marks the beginning of a ‘V’ recovery, powered by the resurgence in tourism offerings. We are sanguine that CDLHT remains the best proxy to a multi-year tourism boom that will take place next year. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. As such, we estimate CDLHT’s FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.

Gained market share through lower rates. The prospects for Singapore tourism has been augmented with improving visitor arrival statistics. Singapore registered a 7.1% growth in visitor arrivals in Sept 09, its first growth since May 08. Better still, CDLHT’s registered a strong occupancy of 86%, significantly higher than the industry’s average of 79%. CDLHT’s strategy of keeping its ARRs lower (S$179 vs. industry’s S$187) resulted in higher RevPARs (S$154 vs. industry’s S$148). We believe CDLHT’s strategy of gaining market through lower rates will likely beef up its RevPARs in the short-term.

Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 6.9% level. We suspect CDLHT could trade towards the 5% level within the next 12 months, implying a recursive fair value of S$2.15. CDLHT is top pick among S-REIT counters.